BIR Ruling [DA-059-03]

February 28, 2003 BIR RULING [DA-059-03] RR 2-2001 Aranas Mendiola & De Jesus Unit 106 G/F Le Metropole Building 326 De la Costa cor. Tordesillas Sts. Salcedo Village, Makati City Attention: Atty. Pericles C. Consunji Gentlemen : This refers to your letter dated November 8, 2002 requesting on behalf of your client, Cebu Toyo Corporation ("CTC"), for confirmation of your opinion that since your client is a PEZA-registered enterprise, it is exempt from payment of the Improperly Accumulated Earnings Tax ("IAET") imposed under Section 29 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001. It is represented that CTC is a domestic corporation that is duly organized and existing under the laws of the Philippines and primarily engaged in the manufacture of element and assembled lenses and various optical components; that it is also a PEZA-registered enterprise located within the Mactan Export Processing Zone in Mactan, Cebu; that it availed of the incentives under Republic Act No. 7916, otherwise known as "The Special Economic Zone Act of 1995"; that under its registration, the company is entitled to certain tax incentives, including an income tax holiday for a period of four (4) years from start of commercial operations in June 1995; that, thereafter, on November 29, 1999, PEZA approved the registration of the company's application for conversion from non-pioneer to pioneer status of its manufacture of element lenses and assembled lenses and granting entitling the company a six (6) year income tax holiday from start of its commercial operations in June 1995; that on February 15, 2001, PEZA approved the registration of the company's expansion project which involves an increase of production capacity of its lens products; that under this registration, CTC is entitled to a three-year income tax holiday incentive on incremental sales from the start of commercial operations or on February 2001, whichever comes earlier; that on June 14, 2001, PEZA approved the company's application for a one-year extension of its income tax holiday based on its net foreign exchange earnings; that consequently, the company's income tax holiday incentive was extended up to May 31, 2002; that upon expiration of its income tax holiday incentive, the company shall be subject to the 5% special tax rate applied on gross income less allowable deductions; and that for tax years 2001 and 2002, CTC has accumulated retained earnings. In reply, please be informed that Section 4 of Rev. Regs. No. 2-2001 provides as follows: "SEC. 4. Coverage. The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income earned starting January 1, 1998 by domestic corporations as defined under the Tax Code and which are classified as closely-held corporations. Provided, however, that Improperly Accumulated Earnings Tax shall not apply to the following corporations: a) Banks and other non-bank financial intermediaries; b) Insurance companies; c) Publicly-held corporations; d) Taxable partnership; e) General professional partnership; f) Non-taxable joint ventures; and g) Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local." Since CTC is a PEZA registered enterprise, this Office hereby holds that it is exempt from payment of the IAET under Section 4 of Revenue Regulations No. 2-2001 implementing Section 29 of the Tax Code of 1997. Accordingly, your opinion is hereby confirmed. SDHTEC This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group